Brazil Inflation Rose as Fastest Pace Since 2004

Traders are betting that central bank President Alexandre Tombini will raise borrowing costs by 0.5 percentage point when he chairs his first policy meeting this month. Photographer: Goh Seng Chong/Bloomberg

Consumer prices, as measured by the benchmark IPCA index,
rose 0.63 percent in December, more than the 0.6 percent median
forecast in a Bloomberg survey of 27 analysts. Prices rose 5.91
percent last year, the fastest year-end annual pace since a
7.6 percent jump in 2004, the national statistics agency said.

“Inflation remains at uncomfortable levels and given price
pressures in the beginning of the year we cannot expect any
improvement soon,” said Silvio Campos Neto, chief economist at
Banco Schahin SA. “Some help from the monetary policy would be
welcomed to show their commitment to the inflation target and
control inflation expectations.”

The central bank targets inflation of 4.5 percent, plus or
minus two percentage points. Last year, the IPCA index posted
the biggest distance from the midpoint target since 2004,
central bank figures show.

In the overnight interest-rate futures market, the yield on
the contract due in January 2012 rose four basis points, or 0.04
percentage point, to 12.14 percent at 6:49 a.m. New York time.
The real fell 0.1 percent to 1.6882 per U.S. dollar.

Traders are betting that central bank President Alexandre
Tombini will raise borrowing costs by 0.5 percentage point when
he chairs his first policy meeting this month, according to
Bloomberg estimates based on interest rate futures contracts.

Brazil’s inflation risk has evolved “unfavorably,” the
central bank said in its quarterly inflation report, published
Dec. 22. Policy makers raised their 2011 inflation forecast to 5
percent, up from 4.6 percent in September, according to the so-called reference scenario, which assumes interest rates remain
unchanged. The projection suggests the need for an adjustment in
interest rates in the “short-term,” the report said.

Slowing Since November

Inflation last month slowed from a 0.83 percent increase in
November. Food prices jumped 1.32 percent last month, and 10.4
percent in 2010, leading all other categories.

Policy makers kept the benchmark Selic rate unchanged at
10.75 percent at their last three policy meetings, after raising
it by 2 percentage points from a record low 8.75 percent during
2010.

In her first speech as President of Brazil on Jan. 1, Dilma
Rousseff pledged to guard the nation from the “plague” of
inflation.

Higher interest rates are attracting capital inflows that
have pushed the real to a two-year high this month. The real has
risen 38 percent since the start of 2009, the second-best
performer among 16 major currencies tracked by Bloomberg after
the Australian dollar.